Authorized for public release by the FOMC Secretariat on 3/17/2020 REC'D IN RECORDS SECTION BOARD OF GOVERNORS OF THE NOV 3 1961 FEDERAL RESERVE SYSTEM WASHINGTON November 3, 1961. CONFIDENTIAL (FR) TO: Federal Open Market Committee FROM: Mr. Young Enclosed is a set of documents relating to System operations in foreign currency that has been presented to the Board of Governors for its information and consideration. At Chairman Martin's suggestion and with the concurrence of the Board, the documents are also being distributed at this time to all members of the Federal Open Market Committee. It is expected that they will be placed on the agenda for consideration at a future meeting of the Committee. Ralph A. Young, Secretary, Federal Open Market Committee. Enclosures. Authorized for public release by the FOMC Secretariat on 3/17/2020 CONFIDENTIAL (FR) November 2, 1961. To: Board of Governors REC'D IN RECORDS SECTION From: Ralph A. Young NOV 3 1961 Subject: System Operations in Foreign Currencies. Following the FOMC discussion of a proposal to initiate System open market operations in foreign currencies at its meeting on September 12, 1961, Chairman Martin requested me, as a basis for further consideration by the Board and the Federal Open Market Committee, to prepare specific plans for implementing that proposal. The complexities of the problem make it impossible to compress these plans into a single document. Therefore, they are embodied in the following drafts: No. 1: Proposed actions of the Board of Governors to amend Regulation N, concerning Federal Reserve Bank accounts with foreign banks; to authorize the Federal Reserve Bank of New York to maintain accounts with designated foreign banks; and to request the Federal Reserve Banks to report their foreign currency holdings. No. 2: Proposed action of the Federal Open Market Committee to issue instructions and a standing directive to the New York Bank on operations in foreign currencies, including the establishment of a Subcommittee to direct and supervise the day-by-day conduct of foreign currency operations of the New York Bank for System account. Authorized for public release by the FOMC Secretariat on 3/17/2020 Board of Governors -2- November 2, 1961. No. 3: Briefing paper for discussion with the Treasury on the division of responsibility for foreign currency opera- tions between the Federal Reserve and the Stabilization Fund. No. 4: Initial action of the proposed FOMC Subcommittee to establish guidelines for the conduct of foreign currency operations of the New York Bank for System account. No. 5: Explanatory paper on aims and scope of System foreign exchange operations, perhaps to be discussed with members of the Congress and possibly to be used as a basis of a press release in case the Board and the FOMC decide to go forward with the operations. Also attached, as No. 6, is a paper prepared by Mr. Hackley at the request of the Federal Open Market Committee, concerning legal aspects of the proposed System operations in foreign currencies. Attachments. Authorized for public release by the FOMC Secretariat on 3/17/2020 Paper No. 1 CONFIDENTIAL (FR) November 2, 1961. Proposed Actions by the Board of Governors NOV 3 1961 A. Amendment to Regulation N Regulation N, Relations with Foreign Banks and Bankers, is amended by changing the numbering of Section 5 to Section 6 and by inserting after Section 4 the following new Section: SECTION 5. ACCOUNTS WITH FOREIGN BANKS (a) Any Federal Reserve Bank, with the approval of the Board, may open and maintain accounts in foreign currencies with such foreign banks as may be designated by the Board. (b) Notwithstanding other provisions of this Regulation, any officer or other representative of a Federal Reserve Bank which now maintains an account with a foreign bank or which opens an account with a foreign bank pursuant to this section may conduct such negotia- tions and enter into such agreements, contracts, or understandings with such foreign bank as may be authorized or directed by the Federal Open Market Committee in order to effectuate the conduct of open market transactions of the Federal Reserve Banks incident to the opening, maintenance, operation, increase, reduction, or discontinuance of such account; and, in any such case, such negotiations, agreements, contracts, or understandings shall be subject to such directions, regulations, and limitations as may be prescribed by, or pursuant to authority of, the Federal Open Market Committee. Authorized for public release by the FOMC Secretariat on 3/17/2020 -2- (c) Upon the opening of any account by any Federal Reserve Bank pursuant to this section, any other Federal Reserve Bank may carry on and conduct transactions through such account. (d) Notwithstanding other provisions of this Regulation, reports with respect to any accounts opened and maintained, or nego- tiations, agreements, contracts, or understandings entered into, pursuant to this section shall be made to the Board by a duly authorized officer of the Federal Reserve Bank involved at least quarterly and more frequently if so requested by the Board. B. Designation of Foreign Banks SUPPLEMENT TO REGULATION N Pursuant to section 5(a) of Regulation N, Relations with Foreign Banks and Bankers, the Board of Governors authorizes the Federal Reserve Bank of New York, in addition to maintenance of existing accounts with the Bank of Canada, the Bank of France, and the Bank of England, to open and maintain accounts in foreign cur- rencies with the following foreign banks: National Bank of Belgium German Federal Bank Bank of Italy Netherlands Bank Swiss National Bank All such accounts shall be subject to the provisions of section 5 of Regulation N, as amended. Authorized for public release by the FOMC Secretariat on 3/17/2020 -3- C. Letter to Presidents of Federal Reserve Banks Dear Sir: Hereafter, the dollar cost of total foreign currency holdings of the Reserve Banks, acquired pursuant to the Federal Open Market Committeets instructions of ___________,1961, should be reported on Form FR 34 in "Other assets" opposite a new caption "Foreign currencies". The amount of such holdings will be shown separately in the Federal Reserve Bulletin table concerning the weekly and monthly consolidated statements of condition of all Federal Reserve Banks. However, these holdings will not be shown separately but will be included as part of "Other assets" in the weekly press statements issued by the Board and the Reserve Banks. The International Financial Statistics section of the Bulletin will show each month averages of daily holdings of foreign currencies for the preceding month. In addition, a breakdown of the holdings by currencies will be shown as of the end of each quarter in the Bulletin issued three months later. Very truly yours, Merritt Sherman, Secretary. Authorized for public release by the FOMC Secretariat on 3/17/2020 REC'D INRECORDS SECTION Paper No. 2 NOV 3 1961 CONFIDENTIAL (FR) (Draft of proposed FOMC actions) Federal Open Market Committee November 2, 1961. A. INSTRUCTIONS REGARDING OPEN MARKET TRANSACTIONS IN FOREIGN CURRENCIES In accordance with Section 5 of Regulation N of the Board of Governors of the Federal Reserve System, as amended, and the Board's action of , 1961, pursuant to Regulation N, the Federal Open Market Committee has issued the following instructions governing open market operations incident to the opening and maintenance by the Federal Reserve Bank of New York (hereafter sometimes referred to as the New York Bank) of accounts with foreign central banks. I. Role of Federal Reserve Bank of New York The New York Bank shall execute all transactions in such currencies for the System Open Market Account, as defined in the Regulation of the Federal Open Market Comittee. II. Purposes of Operations The basic purposes of System operations in and holdings of foreign currencies with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the United States are: (1) To help protect and maintain the value of the dollar in international exchange markets; /Possibly omit Authorized for public release by the FOMC Secretariat on 3/17/2020 -2- (2) To aid in making the existing system of inter- national payments more efficient and in fostering orderly conditions in exchange markets; (3) To promote monetary cooperation with central banks of other countries maintaining convertible currencies, with the International Monetary Fund, and with other international payments institutions; (4) Together with these banks and institutions, to help moderate such temporary imbalances in international payments as may adversely affect monetary reserve positions and thus to provide a first line of defense against international financial instabilities; (5) To encourage growth in the liquid assets available to international money markets in accordance with the needs of an expanding world economy; (6) To facilitate thereby the balanced growth of inter- national trade and investment and thus to contribute to the promotion and maintenance of high levels of economic activity and employment, and of currency relationships favorable to the most efficient use of capital and credit resources and to the stability of international price levels. III. Arrangements with Foreign Central Banks In making operating arrangements with foreign central banks on System exchange holdings the New York Bank shall reserve the freedom to change its balance, subject to the need for minimum working balances. Authorized for public release by the FOMC Secretariat on 3/17/2020 -3- The Bank shall instruct foreign central banks regarding the investment of such balances in accordance with Section 14 (e) of the Federal Reserve Act. The Bank shall consult with foreign central banks on coordina- tion of exchange operations. IV. Maximum Quota for System Foreign Currency Holdings The maximum quota for the New York Bank's total holdings of foreign currencies for System Account shall be the equivalent of $_____________________ computed at cost.